Central Bank warns of risks of global uncertainty, trade tensions
The Central Bank has warned that Ireland’s exposure to global uncertainty and rising political and international trade tensions, raise the prospect of lower trade and economic growth.
The regulator has also cautioned that with the economy performing at or above capacity, expansionary fiscal policy risks aggravating domestic pressures.
The warnings are contained in its Financial Stability Review, the Central Bank’s twice-yearly publication which assesses the main risks facing the financial system.
“A protectionist and fragmented world has negative implications for economic activity domestically and internationally, as well as for the resilience of households, firms and the financial sector,” Governor Gabriel Makhlouf said.
“Financial markets have experienced periods of volatility since the last Review, albeit these have been short-lived. This highlights underlying fragility in market sentiment, and the potential for market disruption if expectations change quickly or if there are further escalations in the geopolitical environment,” he stated.
The research claims the Irish economy is growing strongly and domestic demand is expected to grow this year and next at a faster pace than forecast earlier in the year.
But it also warns that due to Ireland’s exposure to international investment and multinational firms, the country is particularly exposed to global developments at a time of increased geopolitical and geoeconomic risk.
“Moreover, with an economy performing at or above capacity, expansionary fiscal policy risks aggravating domestic pressures,” the Governor said.
The report also points to the risk from the public finances relying heavily on excess corporation tax receipts.
“If these elevated corporate tax receipts were to reverse, or there is a firm or sector-specific shock that negatively impacts on the MNE sector, the subsequent correction to public spending, as well as to the financial positions of households and firms would have adverse macro-financial implications,” the report says.
Asked specifically about the potential implications of the incoming Trump administration in the US for Ireland’s economy, the Governor said it was too early to predict and cautioned that we should wait to see what happens and not “get ahead of ourselves”.
But he said Ireland has benefited hugely from an open interconnected global economy and a change to a more closed fragmented less interconnected economy has big implications for us.
Today’s report says the global economy has continued to make progress towards reducing inflation without instability, but warns some indicators of economic activity have weakened, particularly in Europe.
It cautions that high levels of leverage in parts of the bank and non-bank sector and the growing level of interconnectedness between non-banks and global lenders could lead to an amplification of shocks.
On commercial real estate, the bank says there remains uncertainty about the full scale of the downturn in the markets, which continue to adjust, although prices are starting to stabilise.
“And in Ireland, vacancy rates in the Dublin office market remain high and investment activity is subdued,” the Governor said.
But he added that the Central Bank’s view is that the domestic banking system is resilient to the downturn.
Regarding the housing market, the bank says the supply deficit continues to drive prices domestically, with around 52,000 homes a year needed.
However, the bank added that there are no signs of excessive risk taking in mortgage credit.
The mortgage lending rules, which limit how much people can borrow to buy a home, remain unchanged, with the bank saying they continue to meet their aim of ensuring sustainable lending standards.
The bank said it consider the measures to be “permanent in nature” and that their calibration is “largely driven by slower-moving forces”.
“The refreshed framework for the mortgage measures came into effect on 1 January 2023,” the document said.
“The Central Bank is committed to undertaking monitoring, analysis, engagement and communication around the measures on an ongoing basis. Alongside this continual monitoring, the Central Bank will undertake periodic reviews of the strategy around the measures,” it added.
The bank said that domestic bank profitability had likely reached its cyclical peak, but the sector is resilient and well place to withstand and softening of profits.
The regulator has also left unchanged at 1.5% the Countercyclical Capital Buffer, which is used by the regulator to absorb shocks to the system.
Overall, the report says the growing economy has supported Irish households and businesses.
But it says a shock to international trade could have knock-on effects on the labour market and the performance of domestic firms.
It also points to some emerging risks among small and medium sized firms, with insolvencies rising in the accommodation, food and other service sectors, despite growing employment.
In relation to the upcoming ECB rates decision, the Governor said he would need to see some pretty significant evidence to push him into making a big leap beyond a cut of more than 0.25%.
He added that he would prefer to move “cautiously and prudently” and would like to see services inflation fall further.
Article Source – Central Bank warns of risks of global uncertainty, trade tensions – RTE
